A drag along right allows the majority shareholder of a company to force all other shareholders to accept a buy-out offer, often from a third party like a fund or larger corporation. All of the shareholders receive the same terms of the sale in order to “drag” them along in the same transaction.
Drag along rights are triggered in all types of sale and liquidations transactions. The majority shareholder’s percentage of shares to trigger the drag sale use is determined by company share bylaws and commonly between 51% - 75% of the total shares.
Advantages of Drag Along Rights
Facilitate a Smooth Exit: By allowing the majority shareholder to force minority shareholders to sell their shares, the majority shareholder can sell their shares to a third party without having to negotiate with each individual minority shareholder separately.
- Encourage Investment: Drag along rights can encourage investors to invest in a company. Minority shareholders often feel more confident investing in a company knowing that their shares can be sold along with the majority shareholder's shares, which can make the investment more liquid.
- Simplify Decision-Making: Drag along rights can simplify decision-making by preventing minority shareholders from holding up a sale or merger of the company.
Disadvantages of Drag Along Rights
- Loss of Control: Drag along rights can result in a loss of control for minority shareholders, as they may be forced to sell their shares even if they do not want to.
- Reduced Bargaining Power: Minority shareholders with drag along rights usually have reduced bargaining power when negotiating the terms of a sale.
- Potential for Abuse: Drag along rights can be abused by majority shareholders who may use them to unfairly force minority shareholders to sell their shares. This can result in a loss of value for minority shareholders.